“R ATIONALITY AND R EGULATION OF P AYDAY L OANS ” Paige Marta Skiba Associate Professor of Law...
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“RATIONALITY AND REGULATION OF PAYDAY LOANS” Paige Marta Skiba Associate Professor of Law September 2011
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Transcript of “R ATIONALITY AND R EGULATION OF P AYDAY L OANS ” Paige Marta Skiba Associate Professor of Law...
“RATIONALITY AND REGULATION OF PAYDAY LOANS”
Paige Marta Skiba
Associate Professor of Law
September 2011
REGULATION
Bans Interest rate caps Loan-size restrictions Military constraints Loan lengths Information disclosures
IMPERFECT INFORMATION IN SUBPRIME CREDIT
Information asymmetries are important in theory e.g. Stiglitz and Weiss, 1981
Ensuing credit market failures can create inefficiency at micro and macro level
Understanding causes liquidity constraints is important for policy responses
IMPERFECT INFORMATION IN SUBPRIME CREDIT
Moral Hazard Individual borrowers are more likely to default on larger loans Borrowers do not internalize the default costs of larger loans
Adverse Selection Risky borrowers want to borrow a lot because default likely
EMPIRICAL STRATEGY
The largest recommended loan is a discontinuous function of customer income.
Firms allow loans that are < ½ paycheck.And, loans come in $50increments
Customers with very similar incomes receive different size loans
LOAN ELIGIBILITY
EMPIRICAL STRATEGY
Regressing default on loan amount captures both MH and AS
OLS coefficient on loan size includes1) The causal effect of having a larger loan on the probability of
default ( MH)2) The correlation induced by observably equivalent borrowers taking
out different loans (with private information about their own risks = AS)
To separately identify the effect of MH, we isolate exogenous variation in loan amount
IV instruments loan amount with eligibility indicators, identifying the effect of the loan size holding selection contact (MH)
REGRESSION RESULTS
OLS
Loan Amount 0.038***
(0.003)
Observations 13,246
IV (instrument = offer curve)
Loan Amount -0.041***
(0.014)
Observations 13,246
RESULTS
No moral hazard $100 larger loan decreases probability of default by
4 percentage points
Adverse section Choosing a $100 larger loan increases probability of
default by 8 percentage points
Strong evidence of liquidity constraints An additional $1 of credit available
Borrow 50 centsThis is huge compared to literature
REGULATION
Bans Interest rate caps Loan-size restrictions Military constraints Loan lengths Information disclosures
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Loan Length and Probability of Repayment
Probability Average Loan Length
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REGULATION
Bans Interest rate caps Loan-size restrictions Military constraints Loan lengths Information disclosures
ARMY PERSONNEL ARE MORE LIKELY TO DEFAULT
When controlling for loan length, credit score, loan size, pay frequency, and state, probability of renew and default and statistically significantly different.
RepayRenew
Default
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REFLECTIONS ON EFFECTIVENESS OF PAYDAY LENDING CONSTRAINTS
Bans Misguided
Interest rate caps Essentially banning
Loan-size restrictions Larger loan better?
Military-specific rules ?
Loan lengths Longer or shorter loans doesn’t matter
Information disclosures Useless if care about rollovers
